Introduction to Micro and Macroeconomics

Bachelor 2023/2024

Type: Compulsory course (Data Science and Business Analytics)

Area of studies: Applied Mathematics and Information Science

Delivered by: Big Data and Information Retrieval School

Where: Faculty of Computer Science

When: 2 year, 1-4 module

Mode of studies: offline

Open to: students of one campus

Instructors: Yury V. Avtonomov, Polina Koroleva, Векилян Армине Вагенаковна

Language: English

ECTS credits: 8

Contact hours: 124

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Abstract

Introduction to Economics is a two-semester course for second-year undergraduate students. The goal of this course is to introduce students to the fundamentals of economic analysis and reasoning, which will help them to understand and approach more specialized/applied courses, projects or tasks related to economics. To put it briefly, economics is the study of how society uses its scarce resources. Therefore, its aim is to provide insight into the processes governing the production, distribution and consumption of goods and services in a market economy. One of the key features of economics as opposed to other social sciences is that the principles of economic analysis are (i) simple and (ii) relatively well defined, so they can be used to analyze human behaviour in many different areas of life. Economics is, therefore, much more of a “way of thinking”. And although the course provides some information that is descriptive (e.g., how the banking system works or how one calculates the value of economic output of a country) its main focus is on introducing concepts and models which are used as tools of economic analysis. Concepts such as opportunity cost and approaches such as marginal analysis can be applied widely and prove useful in understanding various aspects of society and people’s lives. Pre-requisites: Students are expected to be competent in basic algebra and calculus and be able to plot and manipulate simple functions.

Learning Objectives

To introduce students to the main analytical tools which are used in economic analysis.
To introduce students to the main conclusions derived from economic analysis, and develop their understanding of their organizational and policy implications.
To enable students to understand and participate in debates on economic matters, choosing proper frameworks of economic analysis for specific cases.

Expected Learning Outcomes

Students should be able to assess the potential and limitations of the models and methods used in economic analysis
Students will be able to apply and use economic concepts and models to analyze real-world issues.
Students will be able to assess the potential and limitations of the models and methods used in economic analysis.
Students will be able to define the main concepts and describe the models and methods used in economic analysis.
Students will be able to formulate real-world issues in the language of economic concepts and models.
define and apply the concepts of opportunity cost, Pareto-efficiency, Pareto-improvement, absolute and comparative advantage
explain the difference between positive and normative economics, microeconomics and macroeconomics
construct production possibilities frontiers using information about inputs, production technologies and/or opportunity costs
identify absolute/comparative advantage, characterise and quantify opportunity costs, identify the possible exchange ratios for mutually beneficial trade from information about production possibility frontiers
construct trade possibility frontiers using information on the participants PPFs and the exchange ratios
Define and apply the concepts of: budget set, budget line, budget line equation, budget constraint. Write down the budget constraint/visualize the budget set from information about the goods' prices, consumer's income, applicable taxes and transfers.
define the assumptions of: completeness, transitivity, continuity, monotonicity, strict monotonicity, convexity and strict convexity. explain their implications for the indifference map of a consumer and her utility function, verify whether an indifference map/utility function satisfies or violates these assumptions.
Define the concept of utility function, marginal utility and marginal rate of substitution (MRS), describe the concept of diminishing marginal utility and diminishing MRS, explain the concept of ordinal utility and its implications for monotonic transformations of utility functions
Write down utility functions that fit verbal descriptions of preferences/graphs of indifference maps/verbal descriptions of consumer choice, compute marginal utility/MRS using the utility function, plot indifference maps using the utility function or a verbal description of consumer's preferences
Use the indifference curves and budget constraints to explain and predict consumer choice, set up and solve the consumer's utility maximization problem (UMP), derive individual demand functions
Quantify the changes in consumer's budget set and optimal consumption bundle from changes in prices, income, taxes or transfers (monetary and in-kind). Illustrate these changes using budget lines and indifference curves. Illustrate the implications of real income changes for normal and inferior goods, luxury goods and necessities. Illustrate the implications of change in the price of one good for the quantity of the other good demanded for gross substitutes and gross complements.
Define the concepts of: ordinary goods, Giffen goods, normal goods, inferior goods, luxury goods and necessities in terms of own-price and income elasticity of demand. Define the concepts of gross substitutes and gross complements in terms of cross-price elasticity of demand.
Compute the values of own-price, cross-price and income elasticity of demand from information on price and/or income changes and the changes in quantities demanded that they caused. Compute the values of own-price, cross-price and income elasticity of demand at a point using demand functions.
Define the concepts of substitution (SE) and income (IE) effect of a price change. Explain the implications of SE and IE for goods with different income elasticities of demand for the own-price elasticities of demand for these goods. Illustrate SE and IE using Hicks and Slutsky methods, compute the changes in quantities demanded due to SE and IE algebraically.
Define and apply the concepts of: production function, production technique, total, marginal and average product of an input.
Define the Law of diminishing marginal returns to an input, explain the reason behind it, verify whether a given production technology conforms to/violates it.
Define increasing/decreasing/constant returns to scale, explain the reasons behind them. Determine the type of returns to scale for a given production function.
Set up and solve the profit maximization problem (PMP) of a price-taking firm. Explain how the type of returns to scale affects the type of solution to PMP. Derive the firm's demand for inputs from its PMP.
Set up and solve the firm's short-run and long-run cost minimization problems (CMPs). Derive the firm's conditional demand for inputs, derive the firm's short- and long-run cost function.
Define the concepts of isoquant, isocost, marginal rate of technical substitution (MRTS). Explain the implications of the Law of diminishing marginal returns for MRTS and isoquant shape. Illustrate the firm's short- and long-run cost minimization problems using isocosts and isoquants, compare the firm's short- and long-run expansion paths.
Explain the difference between accounting and economic cost, accounting and economic profit.
Define and apply the concepts of: marginal cost (MC), fixed cost, quasi-fixed cost, variable cost (VC), average cost (AC), average variable cost (AVC). Derive MC, AVC, AC, FC and VC functions/curves from a cost function/curve. Explain and apply the key interrelations between MC, AVC, AC and VC.
Define economies of scale and explain the connection between economies of scale and the type of returns to scale. Explain non-technological reasons for economies of scale. Compare short- and long-run total, average and marginal costs, illustrate and explain the interrelations between them.
Derive the firm's short- and long-run supply function algebraically from the firm's profit maximization problem. Derive the firm's short-/long-run supply curve from its short-/long-run cost curves. Identify and explain the firm's short-/long-run shutdown price.
Define producer surplus (PS) of an individual firm. Explain the difference between PS and profit. Illustrate the firm's profit/PS using its marginal and average cost curves/supply function.
List and explain the assumptions of the perfectly competitive market model.
Define and apply the concepts of: market demand, market supply, quantities demanded and supplied, direct and inverse demand function, direct and inverse supply function, buyers' and sellers' reservation price, consumer and producer surplus.
Define and apply the concepts of: own-price elasticity of demand, cross-price elasticity of demand, income elasticity of demand. List and explain the determinants of own-price elasticity of demand. Compute own-price, cross-price and income elasticity of demand from demand functions/data on changes in prices/income and quantity demanded. Explain and algebraically derive the relation between total/marginal revenue and own-price elasticity of demand.
Define and apply the concept of own-price elasticity of supply. List and explain its determinants.
Explain and illustrate how price elasticities of demand/supply affect the economic incidence of a tax.
Compute and illustrate market equilibrium price and quantity in the short- and long-run. Illustrate, explain and quantify the consequences of: price controls, quotas, price supports, taxes and subsidies for equilibrium buyers'/sellers' price, equilibrium quantity, consumer and producer surpluses and social welfare.
Define the concepts of: market failure, externalities, common goods, nonexcludability, nonrivalness, pure public goods, average tax rate, marginal tax rate, progressive/proportional/regressive taxation system.
Explain how the Lorenz curve is plotted, how it illustrates the degree of income inequality and how to compute the Gini coeficient. Explain the arguments for and against income redistribution policies.
Illustrate and compute social losses from externalities using augmented supply/demand and nondiscriminating monopoly models. Suggest and quantify several methods of correcting over- or underproduction when externalities are present.
Formulate the Coase theorem, list and assess the validity of its assumptions for specific cases.
Describe the free rider problem. Illustrate and compute social losses from the free rider problem. Discuss the remedies for the free rider problem.
Explain the difference between partial equilibrium and general equilibrium approach to economic modelling.
Describe the assumptions of the 2x2 pure exchange economy model. Illustrate resource allocations, preferences and budget sets in the Edgeworth box. Differentiate between Pareto-optimal and non-Pareto optimal allocations in the Edgeworth box. Define, derive the equation of, and illustrate the contract curve in the Edgeworth box.
Define and derive excess demand in the Edgeworth box model. Find and illustrate equilibrium in the Edgeworth box model.
Formulate the First theorem of welfare economics, discuss its implications.
Formulate the Second theorem of welfare economics, discuss its implications, illustrate cases of its violation in the Edgeworth box.
Formulate the Walras' law and apply it to find equilibrium in the Edgeworth box model.
Describe the determinants of a firm's individual demand for inputs in the short and long run. Define marginal revenue product of labor (MRPL), marginal value product of labor (MVPL) and marginal cost of labor (MCL). Explain the interrelations between MRPL and MVPL for a firm with and without market power in the output market. Explain the interrelations between MCL and wage for a firm with and without market power in the labor market.
Illustrate the optimal quantity of labor hired in the short run and the associated wage for a firm with/without market power in output/labor market. Define a monopsony. Illustrate and compute equilibrium in the monopsonized labor market. Illustrate and compute social losses from market power under a monopsony.
Discuss the reasons for disequilibrium (unemployment) in the labor market. Define transfer earnings and economic rent. Illustrate and quantify the consequences of a minimum wage law for equilibrium in a perfectly competitive/monopsonized labor market, illustrate and quantify its implications for social surplus and economic rent.
Describe and illustrate the individual labor supply decision in the individual labor supply model. Discuss the substitution and wealth effects of a wage change for quantity of labor supplied. Define the worker's reservation wage and illustrate it in the individual labor supply model. Derive the individual labor supply function from individual labor supply model.
Define and apply the concepts of: pure monopoly, natural monopoly, minimum efficient scale of production, natural and strategic entry barriers, marginal revenue, 1st, 2nd and 3rd degree price discrimination, two-part tariff.
Set up a monopoly's profit maximization problem alrebraically, solve for equilibrium price and quantity under non-price-discriminating unregulated monopoly. Illustrate the equilibrium under a monopoly with demand, marginal revenue and marginal cost curves. Illustrate the monopoly's profit/producer surplus.
Derive the interrelation between a monopoly's marginal revenue and own-price elasticity of demand. Intuitively explain why, for a monopoly, marginal revenue is smaller than price. Explain the inefficiency of resource allocation under a monopoly, illustrate and compute the social losses from monopoly power.
Define Lerner's index of market power. Relate Lerner's index to the value of own-price elaticity of demand.
Solve for equilibrium price and quantity under a monopoly in presence of price controls, international trade, taxes and subsidies.
Decsribe how price descrimination affects a monopoly's output, prices, profit and social welfare.
Explain how market demand and the value of minimum efficient scale affect the market structure. Describe the market structures of monopolistic competition and oligopoly, name their similarities with and differences from those of perfect competition and pure monopoly.
Define and apply the concepts of: strategy, dominant/dominated strategy, best response, Nash equilibrium, subgame perfect Nash equilibrium, credible promise/threat.
Construct and use payoff matrices to identify dominant/dominated strategies, best responses and Nash equilibria in simultaneous games. Construct and use game trees to identify dominant/dominated strategies, best responses and subgame perfect Nash equilibria in sequential games.
Define and interpret an N-firm concentration ratio.
Define innocent and strategic entry barriers. Describe how contestability erodes market power.
Describe and illustrate equilibrium in monopolistic competition. Illustrate equilibrium under monopolistic competition, define and identify the excess capacity of a typical firm. Explain why allocation of resources under monopolistic competition is Pareto-inefficient, illustrate and compute the size of social losses from market power under monopolistic competition.
Describe the assumptions of Cournot oligopoly model. Compute the firm's best response functions in a Cournot oligopoly, find Nash equilibrium output and price for two- and N-firm case, compare it to those under monopoly/perfect competition. Illustrate Cournot equilibrium with reaction curves. Explain why equilibrium resource allocation under Cournot oligopoly is inefficient.
Describe the assumptions of Bertrand duopoly model. Find Nash equilibrium prices and output in a Bertrand duopoly, compare it to those under monopoly/perfect competition. Illustrate Bertrand equilibrium with reaction curves. Comment on the realism of the Bertrand model's assumptions and identify possible cases for its application.
Describe the assumptions of Stackelberg oligopoly model. Find Nash equilibrium output and price in a Stackelberg oligopoly, compare it to those under monopoly/perfect competition/Cournot oligopoly.
Define collusion and cartels. Explain why a cartel agreement is inherently unstable. Explain how and when cartel stability may be maintained using a grim trigger strategy.
Discuss internally consistent national accounts; define GDP, explain how GDP can be measured by income, by expenditure and by output and why it produces the same result
Explain and draw the model of circular flow of income between households and firms. Explain why leakages always equal injections. Recognise, understand and use the identity Y ≡ C + I + G + NX.
Identify nominal versus real measures of national income and output. Describe the shortcomings of GDP as a measure of economic activity and wellbeing. Analyse more comprehensive measures of national income and output.
Explain supply-side economics. Discuss growth in potential output. Describe Malthus’ forecast of eventual starvation and how technical progress and capital accumulation made this forecast wrong.
Describe the Solow model of economic growth. Illustrate the steady state levels of capital and output per effective worker. Explain the out-of equilibrium dynamics of capital and output per effective worker.
Analyse the growth performance of rich and poor countries. Explain the convergence hypothesis.
Discuss endogenous growth and the potential impact of government policy on growth. Describe Romer's simplified endogenous growth model.
Discuss the implications of growth for environmental sustainability.
Contrast actual output and potential output. List the assumptions of the Keynesian cross model and explain how aggregate demand determines short-run equilibrium output in this model. Illustrate and compute equilibrium output in the Keynesian cross model.
Explain inflationary and deflationary gaps/positive and negative output gaps. Define the marginal propensity to consume c and the marginal propensity to import z. Analyse consumption demand, investment demand, foreign trade and equilibrium output. Calculate the autonomous spending multiplier and the balanced budget multiplier.
Explain the paradox of thrift. Analyse how fiscal policy affects aggregate demand. Evaluate the limits to discretionary fiscal policy as well as automatic stabilisers.
Explain the structural budget and the inflation-adjusted budget. Discuss how budget deficits add to national debt, and how countries can cope with national debt.
Explain the medium of exchange, unit of account and store of value functions of money. Define the M0, M1 and M4 money aggregates.
Explain how banks create money. Derive the deposit multiplier, loan multiplier and money multiplier.
Define assets, liabilities and equity; describe a commercial bank's balance sheet. Differentiate between a liquidity crisis and solvency crisis.
Identify motives for holding money. Discuss how money demand depends on output, prices and interest rates.
Describe the functions of the Central bank. Describe the Central Bank’s role in influencing the money supply and financial regulation.
Describe money market equilibrium.
Discuss intermediate targets and the transmission mechanism of monetary policy. Describe how a central bank influences money market by open market operations, changing required reserves ratio and changing the discount rate and how interest rates affect consumption and investment demand.
Define and derive the IS curve algebraically and graphically (from the Keynesian cross).
Define and explain the MP (LM) curve.
Use the IS and MP curves (equations) to illustrate (compute) equilibrium in both the output and money markets.
Link real-world events to shifts in the IS (MP) curves. Link fiscal and monetary policy to shifts in the IS (MP) curves, respectively.
Discuss the impact of fiscal policy in the IS-MP model. Discuss the impact of monetary policy in the IS-MP model.
Select and justify a mix of fiscal/monetary policy for various macroeconomic goals; illustrate the policy mix and quantify it using the IS-MP model and describe its consequences.
Describe inflation targets for monetary policy. Explain and graph the "rr" schedule. Define the AD curve and derive the AD curve using the IS and rr curves. Explain how inflation affects aggregate demand.
Define aggregate supply in the classical model (LR AS). Define "crowding out" and explain complete crowding out in the classical model.
Explain how the aggregate supply schedule is linked to labor market equilibrium. Explain how the shape of short run aggregate supply curve (SR AS) is explained by slow wage adjustment.
Use the AD and AS curves to identify short/long-run macroeconomic equlibrium. Explain and illustrate the consequences of temporary and permanent AD and AS shocks on SR and LR equilibrium. Explain how the economy adjusts to temporary and permanent AD/AS shocks. Describe how monetary policy reacts to demand and supply shocks.
Recognise strict/flexible inflation targets. Explain the Taylor rule.
Discuss nominal and real interest rates and inflation.
Define and explain seigniorage and inflation tax. Assess when budget deficits cause money growth.
Explain the Philips curve. Analyse inflation expectations.
Describe and evaluate the costs of inflation. Discuss central bank independence and inflation control.
Discuss the implications of negative inflation and hyperinflation. Define the NAIRU.
Define labor force, employment, unemployment, employment and unemployment rates. Discuss measured unemployment, both claimant count and standardised rate.
Define classical, frictional, structural and demand-deficient unemployment. Distinguish between voluntary and involuntary unemployment. Analyse determinants of unemployment.
Explain how supply-side policies reduce equilibrium unemployment.
Evaluate private and social costs of unemployment.
Explain hysteresis in the labor market.
Describe the LD-LF-AJ model and use it to illustrate voluntary and involuntary unemployment and the impact of demand shocks/labor market policies on unemployment and wages.
Describe the balance of payments accounts. Explain determinants of current account flows. Explain determinants of financial account flows.
Describe equilibrium in the foreign exchange market under fixed and flexible exchange rate regimes.
Define perfect/imperfect capital mobility. Assess speculative behaviour and capital flows.
Describe the IS-MP-BP (Mundell-Fleming) model. Define the BP curve and explain its shape for varying degrees of capital mobility. Define internal and external balance. Illustrate equilibrium and analyze adjustment to fiscal and monetary shocks in the IS-MP-BP model for fixed and flexible exchange rate regimes.
Explain the effects of a devaluation. Explain the J-curve. Define the real exchange rate. Formulate the PPP hypothesis and explain why currencies may be over- or undervalued compared to what the PPP hypothesis predicts.
Formulate the interest rate parity condition and use it to assess the impact of exchange rate on the interest rate and vice versa.

Course Contents

Economics, the economy and tools of economic analysis.
Consumer choice.
The firm.
Perfect competition.
Monopoly.
Market structure and imperfect competition.
Inputs to production: the labour market.
General equilibrium and welfare economics.
Missing markets and the role of government.
Introduction to Macroeconomics.
Output and aggregate demand: Keynesian cross model.
Money and banking.
Monetary and fiscal policy in the short-run.
Aggregate demand and aggregate supply.
Inflation.
Unemployment.
Open economy macroeconomics.
Supply-side economics and economic growth.

Assessment Elements

Home assignments (Fall semester)
Home assignments (Spring semester)
Fall midterm test
Winter final test
Spring midterm test
Spring final test
Quizzes (Fall semester)
Quizzes (spring semester)

Interim Assessment

2023/2024 2nd module
0.25 * Fall midterm test + 0.15 * Home assignments (Fall semester) + 0.15 * Quizzes (Fall semester) + 0.45 * Winter final test
2023/2024 4th module
0.1 * Home assignments (Spring semester) + 0.1 * Quizzes (spring semester) + 0.6 * Spring final test + 0.2 * Spring midterm test

Bibliography

Recommended Core Bibliography

Economics, , 2011

Recommended Additional Bibliography

Blanchard, O., Amighini, A., & Giavazzi, F. (2013). Macroeconomics: A European Perspective (Vol. 2nd ed). Harlow: Pearson. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsebk&AN=1418008
Intermediate microeconomics : a modern approach, Varian, H. R., 1999
Lipsey, R., & Chrystal, A. (2015). Economics. Oxford University Press. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edsrep&AN=edsrep.b.oxp.obooks.9780199676835
Mankiw, N. G. (DE-588)120973626, (DE-576)164048383. (2000). Macroeconomics / N. Gregory Mankiw. New York, NY: Worth. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&site=eds-live&db=edswao&AN=edswao.07890529X

Authors

AVTONOMOV Iurii VLADIMIROVICH
VEKILYAN ARMINE VAGENAKOVNA
Абовьян Наталья Михайловна

Course Syllabus